‘Combination of higher oil prices with rising interest rates is toxic'

Socioeconomic factors and natural calamities directly impact demand and supply of energy sources. Volatility in crude oil prices is one such example. Stating that a combination of oil price increases and rising interest rates is toxic for any economy, Mr Christof Ruehl, Group Chief Economist and Vice-President, BP plc, shares with Business Line his views on the current energy scene and “BP Energy Outlook 2030”.

What kind of crude oil market do you see in the backdrop of the political unrest in some of the producing nations?

Crude market does suffer from what happens in West Asia and the other oil producing nations. In recent times, we have a situation where the drop in deliveries from Libya is being compensated for by Saudi Arabia. Before the unrest started, spare capacity in the system was fairly high at 5.4 million barrels a day, of which 4.1 million barrels were in Saudi Arabia. So Saudi Arabia promised to jump in and compensate, therefore the decline in Saudi's spare capacity, which had started before the unrest, got accelerated.

Besides, OPEC had cut production, while demand was growing rapidly, so spare capacity was depleted even before the unrest started.

So, should we be prepared for higher crude oil prices?

When you had the period of high prices in 2008, the only increase in oil demand was from the countries which subsidise oil products. But now many countries have moved away from subsidies.

Subsidies are also in oil producing nations. What we are seeing is that no matter who wins in individual countries (oil producing), the opposition or the current regimes, there is a tremendous amount of subsidisation, and most of the subsidies go into energy. This will increase energy demand in that region for local consumption, which will hamper exports. Saudi Arabia increased production before the unrest in Libya started, but used it more for the domestic market and power generation. So now, we have two effects which could result in higher oil prices, even without Saudi Arabia being affected directly by higher oil prices, it's bad news for the economy.

Is it something to worry about?

It affects different countries differently, but why are peopled worried about the economy? It is generally because we are in a phase where interest rates are set to increase everywhere. It is the combination of higher oil prices with rising interest rates which is toxic. The last time we had that was in the 1970s.

How much of the crude oil price is speculation? Is it true that crude price is single currency driven?

No, it's not true. It is a myth that crude oil price is currency driven. It is only temporary. Just because sometimes two things move together it doesn't mean they cause each other. There is a possibility that it might be linked, but it is a very rare case and it is impossible to quantify that. Speculators also look at the same things as we do and then they jump on the train.

What kind of impact will the recent calamity in Japan have on the energy market?

There could be an impact on coal, natural gas, and fuel oil. But we have to distinguish the total impact into short, medium and long-term.

In the short term, the nuclear reactors that are shutting will not cause any problem because there's enough natural gas and coal to compensate for that. But the medium-long term situation will be very different, because it's not just Japan, there will be all those countries that may scale down their nuclear energy. Germany has already announced that and some may scale down their growth rates. That, depending on how big that reaction is, could mean that oil would have to replace all that in the future. That's the long-term impact, which is much more interesting than the short term, which is just five days old.

In the energy basket, which fossil fuels will see more demand?

For the fossil fuel, there will be generally more demand for coal in the more competitive markets in the medium term. So in a year from now, there will be more demand for coal and probably higher coal prices. There will be more demand, and probably more supply of an alternative natural gas. The impact on oil prices may not be all that big.

What about non-fossil fuel?

The non-fossil fuels are also very important, because a lot of people will look to find some hydroelectricity, wind or nuclear, which creates electricity.

For electricity, any kind of fuel can be used and people want to use as much as they can in a clean and sustainable fashion so as to not increase the imports, and they don't want to damage the health of the world. So, for the non-fossil fuels, some countries which have hydro-resources will be important, for some countries wind might become very important.

For the first time, all the non-fossil fuels in our 2030 energy outlook will contribute more to energy consumption growth than any other fossil fuel. That is already before the disaster (in Japan) and this trend will grow after the disaster.

Is there a change in BP's investment pattern?

The shift in energy base was predicted a long time ago. As consumption patterns are shifting into the developing world, oil companies will have to move with them, and you can see it.

Just last year we announced investments in Brazil, India, Russia and China. The second implication is that you have to be rational. Yes, investments are important but they have to make economic sense.

Oil prices are not driven by marginal costs — marginal costs are $3 in the Saudi desert. It is driven by all sorts of things, that's why we try to find oil in places outside of these asset restrictions.

Has this shift got something to do with the Gulf of Mexico incident?

The recent $7.2 billion investment in India and others are years in the making. We initiated our plans for the Indian investment way back in 2007. It is just that the incident in the Gulf of Mexico happened by that time. This is important, that serious partners believed BP dealt with the Gulf of Mexico incident in a proper way.

What, according to you, will be an ideal energy mix for any country?

Ideal energy mix would be the one that minimises cost and carbon emissions, and does that in a sustainable way; but it's different for different countries. When you look at fuel shares, gas is the fastest growing within fossil fuel and the only one to gain market share. By 2030 we expect that gas, coal and oil will all be at roughly 27 per cent, which means that although coal and oil grow, they will lose market share. On the non-fossil fuel front, hydro, nuclear and renewables will each have about 7 per cent, which implies very strong growth for the renewable. This means that for the first time ever in human history, all non-fossil fuels put together will contribute more to energy consumption growth than any other fossil fuel.

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